Rosneft Buys BP’s TNK-BP Stake for $26 Billion in Cash, Shares

By Brian Swint -
Oct 22, 2012

OAO Rosneft (ROSN) agreed to buy BP Plc (BP/)’s
half of the TNK-BP venture for about $26 billion in cash and
shares in the biggest acquisition by a Russian company.

BP will sell its 50 percent stake in Russia’s third-largest
oil producer for $17.1 billion in cash and 12.8 percent of
Rosneft’s shares, according to a statement today. BP will
reinvest $4.8 billion in the government’s shares of Rosneft,
leaving it with $12.3 billion in cash, 19.75 percent of the
state-backed company and two board seats.

The disposal, BP’s largest deal for 13 years, is Chief
Executive Officer Bob Dudley’s boldest move yet to transform the
company after the 2010 Gulf of Mexico oil spill. For Rosneft CEO
Igor Sechin, who’s also set to buy the other half of the company
from BP’s billionaire partners, absorbing TNK-BP would raise oil
and gas production to about 4.5 million barrels a day, matching
Exxon Mobil Corp. (XOM)

“It’s a relief for BP that a deal is done,” said Peter Hutton, an analyst at RBC Capital Markets in London. “It’s also
quite an achievement.”

Sechin met Russian President Vladimir Putin today to
discuss the transaction. Rosneft also has an initial agreement
to buy the other half of TNK-BP from a group of billionaires,
according to the statement.

BP has sold about $33 billion in other assets since 2010 as
it focuses on more profitable crude oil production following the
Gulf spill that erased about a third of the company’s market
value. Today’s deal releases BP from a difficult nine-year
relationship with its billionaire partners in TNK-BP, which
accounted for about a quarter of BP’s global output and returned
$19 billion in dividends.

Aging Fields

While TNK-BP had focused on bolstering output from aging
Siberian fields, BP sought to expand in Russian exploration last
year, offering its drilling expertise to Rosneft to tap the
country’s Arctic waters. BP’s TNK-BP partners, represented by
the AAR holding vehicle, blocked that deal.

In 2008, Dudley was forced to resign as head of the venture
and leave Russia after months of battling between the
shareholders over strategy. Mikhail Fridman, one of the
billionaires, quit as CEO of TNK-BP this year, saying the
relationship with BP had run its course.

Fridman and his partners last year argued in court that BP
was required to pursue all opportunities in Russia exclusively
through TNK-BP. Exxon took BP’s place in the deal to explore the
Kara Sea region, and also agreed to start drilling shale
prospects in Siberia.

Cement Control

Rosneft is serving as a vehicle for Putin to cement state
control over the world’s largest oil and gas industry, gaining
more influence over energy revenue to underpin public spending
as Russia’s economy slows. About half of Russian government
revenue comes from the oil and gas industry. If Rosneft buys all
of TNK-BP, its output alone would exceed that of every Middle
Eastern country except Saudi Arabia.

Putin, who returned to the presidency this year following a
term as prime minister, has invited foreign companies into
Russia to keep oil output at a post-Soviet high of 10 million
barrels a day. London-based BP already owns 1.25 percent of
Rosneft, the country’s biggest producer, after buying about $1
billion of shares in its 2006 initial public offering.

Rosneft has relied on Sechin’s access to Putin as the state
strengthened control over the energy industry. The two men have
worked together for more than 20 years.

That ascent has allowed Rosneft to eclipse Kremlin-backed
OAO Gazprom, the world’s largest natural gas producer, as the
dominant force in the Russian energy industry. Increasing
production of shale gas in the U.S. has reduced North American
import demand and prompted European customers to seek cheaper
prices as well, dragging on Gazprom’s performance. It’s also
been targeted by a European Commission antitrust probe of its
pricing practices in central and eastern Europe.